When an enterprise faces financial hardships and rapid depletion of its financial reserves to pay off its creditors’ dues and carry on its business activities, then debt restructuring is seen as a great solution to its existing problems.
Debt restructuring is the process by which a financially troubled or cash starved company, or a sovereign body, reduces and renegotiate the terms of its bad debts in an attempt to enhance its cash flow and improve its financial position.
However, some companies who underwent debt restructuring process a few years back find themselves in the same financial hardships, if not worse, than they were previously. Due to this, debt restructuring process is seen as an ineffective exercise by many troubled business concerns and they perceive that the restructuring won’t do them any good.
However, cash strapped and heavily indebted companies can achieve successful turnaround by implementing some steps systematically.
- It is important for distressed enterprises to get support from lenders to achieve successful turnaround. A company’s turnaround effort receives a boost if its bank debt is restructured as it will secure the value of its business and it can save its assets from distress sale.
- A distressed company can achieve successful turnaround by carrying out detailed viability analyses. Cash strapped enterprises need to analyze the financial variables, market competitiveness, and business strengths. They also need to carry out segmentation analysis of business line profitability, assets, segregating expenses, etc, to keep the costs down, maximize cash inflow, and monetize assets.
- People associated with distressed enterprises must make sure to change their behaviors to achieve successful turnaround. A distressed company must determine the role played by its key people (consultants and employees) and find out those who are responsible for the trouble and do whatever it takes to transform their behavior or make changes in the employee pool of the organization.
- Heavily indebted firms can monetize their assets and exit non core business through strategic sale, disinvestment, or stake sale. If a business concern is not getting adequate profit, or worse, making heavy losses in its non core business operations, then it can consider exiting it after looking for interested buyers. By doing so, the business entity can give more focus to its core business and raise money for further expansion and invest in high growth return vehicles. Article Published by Restructuring Advisory Group
Stressed enterprises can move closer to achieve turnaround by restructuring bank loans, carrying out detailed viability, monetizing assets, and exiting non core business operations through strategic sale, disinvestment, stake sale, etc.